What Makes Post-Financial-Crisis Recoveries So Slow? An Investigation of Implications for Monetary Policy Conduct

Daisuke Ikeda and Takushi Kurozumi

No 15-E-2, Bank of Japan Research Laboratory Series from Bank of Japan

Abstract: The history of financial crises, including the recent global crisis, shows that post-financial-crisis recoveries tend to be slower than usual recoveries. Against this background lie various factors, one of which is a slowdown in productivity induced by a post-crisis deterioration in firms' financing. To avoid a post-crisis slow recovery in which this factor comes into play, how should monetary policy be conducted? Ikeda and Kurozumi (2014) develop a model in which a tightening in firms' financing induces a productivity slowdown and hence a slow recovery, and conduct a monetary policy analysis. The analysis shows that (1) it is crucial for the post-crisis conduct of monetary policy to adopt a policy stance of responding strongly to output growth, while maintaining a response to inflation; and (2) such a policy stance toward output stabilization outperforms that toward inflation stabilization, because it facilitates recoveries in investment and productivity by improving firms' growth expectations.

Keywords: Post-financial-crisis slow recovery; Slowdown in total factor productivity; Welfare-maximizing monetary policy (search for similar items in EconPapers)
JEL-codes: E52 O33 (search for similar items in EconPapers)
Date: 2015-03-24
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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